As is true with many advisory firms, the potential clients who reach out to us are often middle-aged individuals or couples who realize their time horizon before retirement is shrinking. My team and I love working with them to help ensure they are on good financial footing and well-positioned to achieve their long-term financial goals.
But we find it especially satisfying to work with corporate executives in the early stages of their careers — a group often given short shrift by the industry because they have more potential and less current capital. We see courting younger clients with few assets to speak of as an investment in our own future; we are willing to bet that while they may not have a lot of money to invest right now, they will in the future. But it's also a joy to work with this highly motivated, intelligent and receptive demographic.
And younger people need good advice when the markets are seesawing and interest rates and inflation are creeping upward — especially when our schools have failed to teach them financial literacy, whether it be making a budget or balancing a checkbook — let alone understanding employee stock option plans or deferred compensation.
For many young executives, getting a handle on their cash flow can be an issue as they often have more buckets to fill than cash to fill them with — buckets like college loan debt, down payments for a home, children's education and saving for their own eventual retirement as well as meeting basic living expenses. Helping them learn how to manage cash flow can add real value to the relationship which in the long run can give them more capital to invest.
Ultimately, a trusted advisor helps clients to craft and maintain a long-term strategic focus on their finances. But early on, we help young people maximize the financial benefits available to them through their employer, the most basic of which is a company's 401(k) plan, which remains one of the best ways to keep money out of the taxman's hands. We encourage them to enroll at the earliest possible date and to contribute as much as their cash flow allows — at the very least to the level where they are eligible for the "free money" that is the maximum company match.
Many corporate executives also receive company stock. This is one of the most nuanced and misunderstood areas of corporate compensation and is far too complicated for most individuals, even those with a good grasp of financial principles, to handle on their own. Whether through incentive stock options, restricted stock units or performance shares, equity compensation presents a unique opportunity for young executives to build wealth as they grow within their company and as their company's stock grows alongside them.
On the other hand, we often find that corporate executives have too much of their liquid net worth tied to their companies. Advisors should explain to young executives the dangers of having too much of their liquid wealth tied to one asset and then work with them to develop strategies that will benefit from the growth in value of their stock, while opportunistically selling shares when appropriate.
When doing this, however, it is crucial that the advisor stay current on the client's cash flow needs. Such stock is often subject to blackout periods that limit when shares can be sold. There are also different tax implications that the executive may not understand depending on whether the offering is an incentive stock option (ISO), non-qualified stock option (NSO) or restricted stock. Ultimately, the goal of anyone fortunate enough to be granted equity compensation is to exercise their options in a way that maximizes the price while also deferring and minimizing taxes to the greatest possible extent. This is where a knowledgeable financial planner can make a tremendous difference.
Advisors should also make sure that young corporate executives take full advantage of other benefit packages in addition to equity compensation. Non-qualified deferred compensation is another great way for executives to grow their retirement savings and take advantage of tax savings in the years in which they contribute. A deferred compensation plan working in tandem with a 401(k) can help executives maximize the pretax value of whatever type of equity compensation they are granted.
Wealth management firms often talk of hiring next-gen advisors to ensure that a mechanism is in place to care for client families over the long term. Hand-in-hand with that should be an investment in next-generation clients who represent the high and ultrahigh net worth families of the future. Our experience has shown that if we help young clients make the right decisions early on, they are going to have a lot of growth potential in their lives — and we can be there to help them realize it.
